On R&D tax credit, Obama does Reagan one better

President serves up a plan even conservatives can love

September 23, 2010|By Peter Pitts

President Barack Obama's economic agenda has been controversial, to put it mildly. Tea Partiers are marching on Washington to demand reduced government spending, while meek and mild-mannered Nobel Prize-winning economist Paul Krugman criticizes the administration's stimulus as too small. Nobody seems to agree on what will create jobs and get the economy back on track.

Fortunately, the president recently put forward an economic proposal that the whole country should be able to get behind. Its core component is expanding the research and development tax credit.

This move builds on the legacy of Ronald Reagan, who introduced the tax credit in 1982. However, the credit has always been temporary, requiring congressional reauthorization roughly every two years since.

Mr. Obama's proposal would allow companies to take a 17 percent deduction above 50 percent of R&D costs. That's a significant increase over the previous 14 percent rate. And the credit would be made permanent, allowing businesses to make better long-term plans and invest in new research with confidence.

More to the point, the Obama tax credit addresses an urgent economic need. Today, the size of America's Research and Development Tax Credit ranks 17th among the 30 nations measured by the Organization for Economic Co-operation and Development. A decade ago, our credit was the biggest in the world. Even France now has an R&D credit four times larger than ours.

We can't afford to lose our advantage in innovation. Research and development are at the heart of America's most vibrant industries. Case in point: The biopharmaceutical sector.

Biopharma innovation is usually noteworthy for saving lives. Three years after introducing the first antiretroviral treatments, AIDS deaths dropped 70 percent, and new pharmaceuticals are largely responsible for cutting cancer death rates in half.

Less well known are the tremendous economic benefits of the industry. Biopharma directly employs some 700,000 Americans and indirectly supports 3.2 million more jobs. The average biopharma salary in 2008 was $77,595. That's $32,000 more than the average private-sector job.

From 1996 to 2006, the rate of job growth in biopharma was twice the national average. Even through the first year of the current recession, when overall private sector unemployment fell, the biopharmaceutical sector grew by 1.4 percent.

Globally, America dominates this rapidly expanding, high-wage industry. In 2007, America had 2,700 new drugs under development, compared with 1,700 being developed by all other countries combined.

But with other countries offering huge tax credits for research and development, America can't count on biopharmaceutical dominance forever.

On average, a new biotech drug costs more than a billion dollars to develop. And for every new drug that gets FDA approval and makes it to market, 5,000 to 10,000 unsuccessful drugs get tested. America's R&D tax credit provides significant support for this industry.

A bigger and permanent credit would boost the biopharmaceutical industry, help create new, life-enhancing drugs, and drastically cut down on overall medical expenses. It's estimated that each additional dollar spent on new pharmaceuticals saves $7 elsewhere in the economy.

At first glance, a bigger R&D tax credit might seem like just more government spending. But the evidence suggests the credit would create jobs and pay for itself.

According to a 2010 study by the Milken Institute, increasing this credit by 25 percent and making it permanent would add $206.3 billion to real GDP and raise total employment by 510,000 jobs within a decade.

By comparison, the Research and Development Tax Credit is currently estimated to cost just $7 billion a year.

At a time when there's a lot of partisan rancor over economic policy, Mr. Obama's proposal is the expansion of an existing policy that has had bipartisan support for decades. There are precious few points of agreement on the economy these days. A bipartisan solution with almost no economic downside rarely comes along. We shouldn't miss the opportunity to expand and make permanent the Research and Development Tax Credit.

Peter Pitts, a former FDA associate commissioner, is president of the Center for Medicine in the Public Interest, a nonprofit that receives some funding from the pharmaceutical industry. His e-mail is peter.pitts@cmpi.org.